Cryptocurrency has exploded in popularity over the past few years, with more and more people in the UK investing in Bitcoin, Ethereum, and other digital assets. But, while the potential for profits is exciting, many investors don’t realise that crypto is subject to taxation just like any other traditional investment. 

So, how does HMRC treat cryptocurrency, and what do you need to know to stay compliant? Let’s break it down.

What is Cryptocurrency?

Cryptocurrency is a form of digital or virtual currency that uses cryptography for security. Unlike traditional currencies issued by governments (like GBP or USD), cryptocurrencies operate on decentralised networks based on blockchain technology. 

Popular cryptocurrencies include Bitcoin (BTC), Ethereum (ETH), and Ripple (XRP). People buy, sell, and trade these digital assets for investment, payments, or other financial activities.

Is Cryptocurrency Taxed in the UK?

Yes! HMRC considers cryptocurrency to be an asset, not a currency. This means that any profits or earnings from crypto transactions may be subject to Capital Gains Tax (CGT) or Income Tax, depending on the nature of your activity.

Unlike some countries that have yet to regulate crypto taxation, the UK has clear rules in place. 

Whether you’re an investor, trader, miner, or receiving crypto as payment, it’s essential to understand how tax applies to your situation. If you’re unsure about your tax obligations, working with professional accountants in Crawley can help you stay compliant.

Capital Gains Tax (CGT) on Crypto

For most individuals, cryptocurrency will fall under Capital Gains Tax rules. This applies when you dispose of your crypto assets, which includes:

• Selling crypto for fiat currency (e.g., GBP)
• Swapping one cryptocurrency for another (e.g., exchanging Bitcoin for Ethereum)
• Using crypto to purchase goods or services
• Gifting crypto (unless to a spouse or civil partner)

How is CGT Calculated?Your capital gain is the difference between the price you bought your crypto for (the cost basis) and the price you sold it for. For example:

• You buy 1 Bitcoin for £20,000.
• You sell it later for £30,000.
• Your capital gain is £10,000.

Capital Gains Tax AllowanceFor the 2024/25 tax year, individuals have a CGT allowance of £3,000. This means you only pay tax on gains exceeding this amount.CGT Tax RatesIf your gains exceed the allowance, the tax rate depends on your income bracket:

• Basic-rate taxpayers (income up to £50,270): 10%
• Higher-rate taxpayers (income above £50,270): 20%

Example: If your taxable income is £40,000 and your capital gains are £10,000, you’d only pay CGT on £7,000 (after the £3,000 allowance), taxed at 10% = £700.Income Tax on CryptocurrencyIn some cases, HMRC treats cryptocurrency earnings as income rather than capital gains. This happens when you receive crypto through:

• Mining
• Staking rewards
• Airdrops (if received as part of work or business)
• Being paid in crypto for goods or services

How is Crypto Income Taxed?Crypto income is taxed like regular earnings and is subject to Income Tax and National Insurance. The rates for 2024/25 are:

• Basic rate (£12,571 to £50,270): 20%
• Higher rate (£50,271 - £125,140): 40%
• Additional rate (over £125,140): 45%

For example, if you earn £5,000 from crypto staking and your total income is £45,000, it will be taxed at 20%.What About Losses? Can They Reduce Your Tax Bill?Yes! If you sell crypto at a loss, you can use that loss to offset gains from other investments, potentially reducing your tax bill. You must report these losses to HMRC, and they can be carried forward to offset future gains.For example:

• You make a £3,000 gain from selling Bitcoin.
• You make a £1,500 loss from selling Ethereum.
• Your total taxable gain is £1,500.

How to Report Crypto Taxes to HMRCIf you owe tax on cryptocurrency, you must report it through a Self-Assessment Tax Return. Here’s what to do:

1. Keep records of all transactions, including dates, amounts, and counterparties.
2. Calculate your total gains or income from crypto.
3. Submit your tax return by 31 January (for online submissions).
4. Pay any tax due by the same deadline.

Using tax software or consulting an accountant can help make this process easier. If you need expert guidance, Curve Accountancy, a trusted team of accountants in Crawley, can assist you with your crypto tax returns.Common Mistakes to Avoid

1. Forgetting to Report Crypto Swaps
   Swapping Bitcoin for Ethereum? That’s a taxable event in HMRC’s eyes!
   
   
2. Not Keeping Records
   HMRC expects detailed records of all transactions. Use crypto tax tools to automate tracking.
   
   
3. Ignoring Small Transactions
   Even if your gains seem small, they can add up and exceed the tax-free allowance.
   
   
4. Not Reporting Airdrops or Staking Rewards
   If you receive free crypto, HMRC may still see it as taxable income.
   

How to Legally Reduce Your Crypto Tax Bill

• Use your CGT allowance (£3,000 in 2024/25).
• Offset losses against gains.
• Consider gifting crypto to your spouse (transfers between spouses are tax-free).
• Time disposals strategically to stay within lower tax brackets.

Final Thoughts

Crypto taxation in the UK can be complex, but understanding the basics of Capital Gains Tax and Income Tax can help you stay compliant and avoid costly mistakes. If you’re unsure about your obligations, speaking to an accountant like Curve Accountancy, who are experienced accountants in Crawley, is a smart move.Need help with your crypto tax returns?

Get in touch with Curve Accountancy today!